Download this Paper Open PDF in Browser

Thomas Piketty and Inequality: Legal Causes and Tax Solutions

11 Pages Posted: 9 Dec 2014 Last revised: 1 Feb 2015

Paul L. Caron

Pepperdine University - School of Law

Date Written: December 8, 2014

Abstract

Thomas Piketty's Capital in the Twenty-first Century has acted as an accelerant fueling the fiery public debate over increasing inequality in America and around the world. Piketty makes the provocative empirical claim that the rate of return to private capital inevitably exceeds the rate of economic growth (r > g) and thus leads to growing concentrations of wealth among the richest members of society. Piketty has spawned heated debates in newspapers, magazines, and blogs, which soon will continue in academic journals and law reviews. Shi-Ling Hsu is one of the first out of the gate with The Rise and Rise of the One Percent: Considering Legal Causes of Wealth Inequality, 64 Emory L.J. Online 2043 (2015) (http://ssrn.com/abstract=2477991).

Hsu focuses on the interesting question of how law and legal institutions foster inflated returns on capital (Piketty's r). He also makes the important point that lawmakers often conflate Piketty's r with g (public economic growth), resulting in laws that boost the former with little discernible impact on the latter. The bulk of Hsu's argument is devoted to explaining how four areas of American law contribute to "the legal enrichment of the one percent": financial regulation, oil and gas subsidies, transition relief, and electric utility regulation. He concludes with a plea for greater federal funding of education to fuel greater economic growth and bridge the deepening inequality chasm in America.

Hsu's essay is a significant contribution to what is certain to be an energetic debate over the implications of Piketty's work. The need to examine the impact of legal rules and institutions on both private capital returns and public economic growth will be an enduring contribution to future scholarship on the extent, consequences, and reduction of income and wealth inequality. I offer here two modest reactions to Hsu's essay: (1) recent inequality research has shifted the focus of high-end wealth concentration from the Top 1% to the Top 0.1% (and even the Top 0.01%), with important implications for the work of both Piketty and Hsu, including (2) the inquiry into whether policymakers should intervene before the fact to re-shape the distribution of the benefits and burdens of economic activity (Hsu's approach) or instead redistribute wealth after the fact (Piketty's approach).

In a recent essay, Joseph Bankman and I argued that tax scholars need to focus more of our work on how policymakers should address the federal government's unprecedented (and growing) fiscal imbalance. California Dreamin’: Tax Scholarship in a Time of Fiscal Crisis, 48 U.C. Davis L. Rev. 405 (2014) (http://ssrn.com/abstract=2518607). In Piketty terms, s (spending) > r (revenues). We proposed that California's recent tax increases on the wealthy should provide a template for the nation to bring r more into alignment with s.

Piketty's pioneering work provides added impetus for deploying the tax system in this effort. Increasing the tax burden on the wealthy would both raise revenue to meet the nation's spending needs and redistribute wealth to alleviate Gatsby-level inequality in America. Hsu’s proposed focus on the distributional impact of laws and legal institutions may prove to be helpful in the long run but a chimera in the short term as the nation's fiscal and inequality challenges demand solutions that only the tax system stands ready to provide. In short, raising taxes on the wealthy would both increase r (revenues) to better match s (spending) and decrease r (private capital returns) to better match g (public economic growth).

Keywords: Piketty, Inequality, Tax Reform

JEL Classification: K34, H2

Suggested Citation

Caron, Paul L., Thomas Piketty and Inequality: Legal Causes and Tax Solutions (December 8, 2014). Emory Law Journal Online, Vol. 64, p. 2073, 2015; Pepperdine University Legal Studies Research Paper No. 2014/32. Available at SSRN: https://ssrn.com/abstract=2535595

Paul Caron (Contact Author)

Pepperdine University - School of Law ( email )

24255 Pacific Coast Highway
Malibu, CA 90263
United States
310.506.4266 (Phone)

Paper statistics

Downloads
351
Rank
71,337
Abstract Views
1,787